Dollar-pegged oil exporters mull break as inflation goes out of control

KUWAIT CITY, Oct 1, 2007 (AFP) – The US interest rates cut has revived a fierce debate on whether the oil-rich Gulf Arab states should keep their currencies pegged to the dollar and bear the crunch of high inflation. The six-nation Gulf Cooperation Council (GCC) states are experiencing high growth rates of between four to eight percent, thanks to soaring oil revenues that boosted liquidity to new levels.

But as a result, inflation has risen to double-digits in some Gulf states.

Barring Kuwait, which in May dropped the dollar peg in favour of a basket of currencies to ward off imported inflation, the remaining five states, including oil powerhouse Saudi Arabia, have kept their currencies linked to the dollar.

To preserve the value of their national currencies, Gulf states have in the past matched any movement in US interest rates, but this time most of them left their monetary policies almost unchanged.

On one hand, a rate cut by Gulf states would further increase liquidity and spur the already high inflation rate.

On the other hand, a decision not to cut rates would undermine the value of their currencies, which are linked to a sliding dollar, and huge assets.

This dilemma has encourage